The busiest US air market is dominated by Southwest as others continue to cut-back

Analysis

The battle for the north-south California traffic has a winner: Southwest Airlines. In a recent announcement, Delta Air Lines became the latest carrier to announce it will trim capacity between San Francisco and Los Angeles – from 77 to 49 weekly frequencies. The flights are all operated with regional jets and provide connections from SFO to Delta’s larger network at LAX.

A market contested for decades with constantly remixed competitors

In itself, it is hardly a noteworthy development, but it does represent the almost endless adjustments to capacity between Northern and Southern California that has characterised the route for decades. As shown by the table taken from CAPA’s new Route Rankings Tool, LAX/SFO is the busiest route in the nation in terms of scheduled seats, in addition to ranking as one of the top global routes. See related report: The world's top ten routes are in Asia Pacific

But it has a long and checkered history and has gone full circle since before deregulation when the route was also dominated by non-legacy carriers.

Top 10 domestic routes in the US (seats per week): 05-Sep-2011 to 11-Sep-2011

Pre-deregulation market

Prior to deregulation, rights on the LAX-SFO route by the nation’s trunk carriers were granted by the Civil Aeronautics Board, and many of the mainline carriers operated the route as a tag on longer, linear routes.

TWA was one of the carriers authorised for the route and operated eight daily frequencies; the SFO-LAX portion seen as the California “catchment” portion of east or westbound flights. The same was true, but to a lesser degree, of others and United patched together a “sort-of” hourly schedule. Pan Am, Braniff and Northwest operated the segment as part of international services and thus had restrictions on their carriage.

But the vast majority of seats was provided by two intrastate carriers, Pacific Southwest Airlines (PSA) which began service in 1958 and Air California (OC), known as AirCal, arriving on the scene in 1967. These airlines were regulated by the state of California as their services were confined to routes within the state. They both operated high-frequency, shuttle-like coastal networks.

Both featured minimally-clad young flight attendants and were extraordinarily popular with travellers. Regular flyers were known by the crew and often welcomed by name on boarding.

Fares were also certified by the state, resulting in levels for PS and OC that were much lower than the filed CAB fares. However, most of the line carriers matched the lower fares for that segment.

As can be seen from the first chart, PSA dominated the SFO-LAX route and OC operated primarily to/from secondary airports. Though SFO/LAX dominated, even before deregulation the California north-south service involved multiple airports.

Deregulation effects felt by 1985

A decade later, the effects of deregulation were visible in the market and the list of operators had grown. Gone was the separate section for “intrastate” operators and the PS and OC flights were displayed among the mainline listings.

Pan Am was now able to carry local traffic on its 747s trundling onwards to foreign cities, but Braniff was gone and Northwest had divided its routes. Western was struggling and would merge with Delta in less than a year, so the route began to be dominated by three players – United, with hourly service, PSA and Air California.

But change across the board was looming. Western was not alone in its post-deregulation difficulties. Both PSA and AirCal operated business models that had adapted poorly to the deregulated environment and within a year both would be purchased: PSA by US Air, trying to branch out from its east coast homeland; and AirCal by American, seeking to build up San Jose and counter United’s power at SFO.

Alaska was also a player but challenged the incumbents only between secondary airports. And, unlike 1975, by 1985 Orange County’s John Wayne Airport was a player in the coastal market, visited by PS and OC.

Rationalisation by 1995

Ten years later, the market had changed dramatically and the roster of operating airlines had significantly diminished.

Southwest had been present at SFO but left as the airport’s frequent delays were problematic for an airline founded on quick turnarounds and frequent service. But neither Oakland nor San Jose were similarly handicapped and WN began to dominate at those two fields.

None of the 1986 mergers ended well and the coastal remnants of Western, PSA and AirCal were few and far between. US Air was unable to sustain the loyalty of PSA’s faithful and, after a great fanfare at the outset followed by huge losses, completely abandoned the PSA network.

And there was a newcomer, Reno Air (QQ), based in Reno and serving much of the coastal west. It began operations in 1992 and then acquired American’s coastal hub routes at San Jose, but maintained close association with AA at the airport.

However, the experiment was short-lived and in 1999 QQ was also absorbed by American in a bid to, once again, counter United.

At SFO, United had become the predominant player but was constrained in its pricing by the power of Southwest at the nearby alternate airports. In an attempt to lower its costs vis-à-vis Southwest, in 1993 the airline established its low-cost alternative, Shuttle-by-United.

Although it was seen as a way to provide a competitive offer, the aircraft and staff were drawn from United’s fleet and labor force and the sub group was ill-equipped to counter WN. Along with the aircraft and staff went the United culture, a mindset that was not compatible with the kind of rapid-fire, off-the-cuff operation that existed at Southwest.

Since the results were not separately published, its operating financials were never accurately known. But the airline soon earned a reputation for poor punctuality and service that lacked the homey appeal of Southwest. It was disbanded shortly after 9/11, replaced by UA mainline. With Delta and US Air having a very minimal presence, the north-south corridor essentially became a two-horse race.

9/11 provokes more change by 2005

A decade later the US carriers were still rearranging themselves in a post-9/11 world.

While the number of players had increased slightly, the clear winner was Southwest, now back in the SFO-LAX market, and dominating every other route. American, which had no international flights at SFO, connected the airport to its much more substantial network (and its alliance partner LAN) at LAX.

San Jose mainline competition was limited and operated primarily with RJs, ceding WN 737s most of the seat offer. Alaska operated a few SFO-LAX services as tags for Mexico flights but only had a substantial presence at Orange County.

In 2003, United resurrected the “airline within an airline” concept in the form of Ted. While both SFO and LAX were “focus cities,” most of the coastal flights were operated by United mainline B737s. Like the Shuttle before it, Ted never really got traction, a failure again probably partly due to cultural strictures, and United “de-Teded” in 2008.

Not only between LAX and SFO, but on coastal operations to Washington and Oregon as well, the only strong, widespread competitors were Southwest and Alaska, with the exception of SFO-LAX where United held on to a significant market share, albeit with fare levels dictated by Southwest.

The California corridor was one of the first major US markets in which the low-cost player dominated – and neutralised most of the legacy competition.

In the post-fuel spike and economic meltdown era, the legacy carriers withdrew from many secondary markets including Oakland and San Jose, where competition is minimal. In a pattern going back 20 years, many of the mainline carrier services are timed to feed long-haul services operated from LAX, rather than designed to offer a variety of flights for the local traffic across a variety of airports.

United continues to be the primary challenger at SFO but there is a newcomer in the form of Virgin America, based at SFO. Alaska has backed out except for a few Bombardier SJC flights, and the legacy incumbents offer only RJs on most of their services.

Given the competitive challenge presented by UA and WN at SFO, it is no surprise that Delta has decided to reduce its offer in the market. The RJ services are used to feed other Delta non-stop services from LAX, like the Sydney flight, and offer an alternative to connections via other Delta hubs.

American connects SFO and LAX with six daily flights, operating primarily in the morning or evening, with but one afternoon flight at 14.25.

Withstanding a catastrophic event, Southwest will likely continue to dominate the California corridor from now on. Virgin America has no intent to serve either OAK or SJC and will certainly not mount a full-court press to dislodge either UA or WN at SFO.

American’s cornerstone strategy will likely keep it in the feed-market, but AA has been downsizing rather than increasing its SFO flights. And now, a similar mindset is being shown by the route planners at Delta.

There are few major US markets in which the legacy carriers have been so completely upended by a low-cost rival, and a key national market overtaken. It is also unlikely to happen in other top markets.

In all of the other top 10, a fortress hub is one end of the city pairs and Southwest has no presence at ORD, JFK or DFW. Its effects at Atlanta are yet to be seen, but Delta is unlikely to cede share between ATL and LGA.

The nature of the California traffic was a unique opportunity for Southwest. The market had numerous city-pair combinations, the two major airports LAX and SFO are far less dominated than are hub airports elsewhere in the US and the presence decades ago of PSA accustomed travellers between Northern and Southern California to low fares and “chipper” service. It remains a market ideally suited to Southwest’s particular strengths.